Japan’s Stance On The Trans-Pacific Partnership – Analysis

Ever since the US launched the Trans-Pacific Partnership (TPP) negotiations, Japan remained ambivalent, until Prime Minister Abe Shinzo announced in a press conference in Tokyo on 15 March 2013 about Japan’s readiness to take part in the negotiations and his decision to notify Japan’s intention to the TPP countries.1 There had been various opinions amongst political parties, including his own Liberal Democratic Party (LDP), which split public opinion and Abe reached the decision after carefully examining those opinions. This is a huge gamble on Abe’s part but can also prove to be an economic boon for Japan.

Rationale

Abe based his argument on the fact that the Pacific Ocean, the largest ocean which covers one-third of the earth’s surface, is now becoming an inland sea of a gigantic economic zone. Eleven countries surrounding the Pacific Ocean are participating in the TPP negotiations. What the TPP is aiming for is to make the Pacific Ocean a sea on which goods, services and investment freely go across. A large economic zone which accounts for one-third of the world economy is emerging. Taking note of the first post-war Trade White Paper issued in 1949 when Japan was still under occupation, which argued amidst burnt-out ruins that “economic independence cannot even be an aspiration without promotion of international trade.” He underscored the point that it was in this determination that Japan chose the path to achieve prosperity under the free trade system. In 1955, Japan joined GATT, which promoted free trade around the world, as the first Asian country to do so. Expanding its exports, the Japanese economy achieved an astounding twenty-fold growth in twenty years. In 1968, Japan became the second largest economic power in the world after the United States. It slipped to the third place in 2010, conceding the second place to China.

For the past over two decades, Japan has been confronting big challenges, both internally and externally. With a decreasing birthrate and the resultant aging society, the social security burden has increased on the government. The country has experienced prolonged deflation. Though this does not mean to suggest that Japan has become suddenly inward-looking, it is somehow unable to come out from the prolonged recession. A virtual leadership vacuum has compounded Japan’s economic woes. In the meantime, other countries have dynamically changed their direction towards open economies aiming to incorporate overseas growth. The US and Europe have started to move toward negotiations for an economic partnership agreement between them.

South Korea has also concluded free trade agreements with the US and the EU. Other emerging powers in Asia are turning themselves into open economies one after another. If the perceived image of Japan as inward-looking continues, Japan would be denied any chance of growth. Companies would be deterred from investing in Japan. The knowledge poll will look for greener pasture elsewhere. It is because of this realization that Abe sees the TPP framework that promises “prosperity in the future” in the Asia-Pacific.

Economic argument

If Japan does indeed join the TPP arrangement, the economic impact of elimination of tariffs needs to be factored in Japan’s calculus. But if the government makes a united effort instead of unorganized effort by each ministry, Japan’s economy would be expected to gain from the TPP’s positive influence as a whole even if all tariffs are eliminated.

What would be the immediate impact on Japan’s economy? The impact will be both negative and positive. On the negative side, it will result in the decrease in production of agriculture, forestry and fisheries. This is based on an extremely simplified assumption that all tariffs are eliminated immediately, with no commensurate domestic measures to offset the loss. The government will however try to make every effort to minimize its negative impact, such as special considerations for the sensitive items in the negotiations. On the positive side, the government would review other effects that come from being connected to the economic zone that accounts for one third of the world’s economy.

The significance of the TPP is not limited to the economic impact on Japan. Japan is creating a new economic zone with its ally, the US. Other countries who share the universal values of freedom, democracy, basic human rights, and the rule of law are also joining. Creating new rules in the Asia-Pacific region with these countries would be not only in Japan’s national interests, but also certain to bring prosperity to the world. Furthermore, deepening economic interdependence with these countries in a common economic order will significantly contribute to the security of Japan and also to the stability of the Asia-Pacific region. The new economic order which will be created with the two major economic powers, Japan and the US, would not remain the “TPP only” rules. It should serve as a basis for rule-making beyond the TPP, in Regional Comprehensive Economic Partnership (RCEP) and in the larger initiative of Free Trade Area of the Asia-Pacific (FTAAP).

Abe’s argument, thus, is that if Japan loses this opportunity, Japan will be left out from the rule-making in the world. He further argues that future historians will no doubt see that “the TPP was the opening of the Asia-Pacific Century” and that Japan has to be at the heart of the Asia Pacific Century. Will then Japan’s participation in the negotiations for the TPP will be a provident masterstroke? Opinions within Japan are divided.

Why TPP?

The TPP negotiations started two years ago. Being a latecomer, it would be difficult for Japan to overturn the rules which have already been agreed by the 11 countries already in negotiations. For example, Canada and Mexico, when they joined the negotiations had to accept the disadvantage that they would not be able to overturn what had been agreed and other such advantages, such as they would not be allowed to call off negotiations. However, Japan has not received the sort of letter which Mexico and Canada are said to have received. In any case, not much negotiation has taken place on tariffs, for example, amongst other issues, and there are many issues which are not decided yet. The argument, therefore, is if Japan does not participate now, it will virtually have to abandon the notion of the TPP, because it will not be able to participate in the negotiations at all. Being the world’s third largest economy, Japan can lead efforts to make new rules as an important player if it joins the negotiations without missing more time.

How does the LDP plan to allay the concerns of the people? It may be recalled that in the course of the election campaign, the LDP pledged to the Japanese people that it would oppose participation in the TPP negotiations as long as the requirement for participation is that the Japanese Government makes a prior commitment to eliminate tariffs with no sanctuary. The LDP promised to give utmost priority to secure the five sensitive items of rice, wheat, beef and pork, dairy, and sugar as well as the universal health insurance system as sanctuaries. In keeping with the LDP’s promise made to the Japanese people, Abe made it clear to President Obama during his meeting that a prior commitment to eliminate tariffs with no sanctuary is not a requirement for Japan to participate in the TPP negotiations. Being a nationalist himself, Abe is expected to pursue a path only if that is in Japan’s national interests.

What are Japan’s most important national interests? With its proud national character and a predominantly an agrarian culture based on self-help and self-reliance, a social security system based on the world-class universal health care insurance system embedded in Japan’s culture, Abe is unlikely to concede if this national character is secured.

Impact on agriculture

The agriculture sector will be the most affected if Japan joins the TPP. Unfortunately, this sector is also ailing, which adds to Japan’s woes. The average age of the primary farming population is now sixty-six. It grew older by ten years during the last twenty years. The younger generation of Japanese people is no longer attracted to this industry despite government subsidies provided in plenty. Over the past two decades, the number of people abandoning farming fields has approximately doubled. If Japan finally participate the TPP, it will be another challenge to any government in office to resuscitate the country’s affluent agriculture and farm villages so that the young can have a dream in the future.

There is a fear that the loss in agriculture will amount to 3 trillion yen. Strong opposition from farmers’ groups may well be expected.2 The fears that the agriculture sector will be affected adversely are sometime misplaced. Japan’s agricultural products are carefully grown in the four seasons. As the world becomes richer, those agricultural products will become increasingly popular.

For example, Hita nashi pears, a specialty of Oita prefecture, is exported to Taiwan despite its price, which is five times as high as local products. In Hokkaido, there is an example of a particular type of rice which takes advantage of its climate as the snowy country. This type of rice expanded its exports by seven times over five years. By increasing its competitiveness and expanding exports by an aggressive agricultural policy, Japan can make agriculture a growing industry. For that purpose, the TPP should not be seen as a crisis; it is a big chance. However, unless the government enacts measures to improve areas with poor conditions and disadvantages such as hilly and mountainous areas, and addresses to the concerns of the farm sector, TPP will bring in more loss than benefit. The LDP wants to strengthen the long-running trust that it has built with rural communities and farmers and wants to build on this trust. Crafting a policy that serves the country’s national interest should be a priority for the Abe-II government.

Misplaced Fear

There are fears that Japan may lose its tariff autonomy. Are these fear based on objective assessment? The truism is that it is not that Japan will have to reduce its tariffs unilaterally; rather all the parties to the TPP will reduce and eliminate their tariffs based on the negotiation results. If this is true, the government of the time will need to address to the concerns faithfully through negotiations and maintain total transparency as the negotiation proceeds.

Elimination of tariffs on many products will lead to lower prices, which will be in the interest of consumers. This will lead to the increased purchasing power which will positively contribute to the GDP. Therefore, the consumers’ benefits are taken into account in the Government’s estimate. In addition, agriculture has multi-functionality, such as storing water, protecting the region, preserving the environment and absorbing carbon dioxide. People who live in urban areas also benefit from these functions. Seen from this multi-functionality perspective, agriculture cannot be another industry where a workforce is simply unnecessary. This multi-functionality is intertwined with the very culture of Japan. Abe is determined to secure it. That would be a severe test to him.

As regards the government’s economic, fiscal and monetary policies, income of people will decline year by year if the current policies are abandoned. As pensions are indexed to prices, deflation means less pension income. If stock prices go down, this will mean investment losses for pension accounts. If the stock price of JT goes down, for example, this will mean less profit on sale which can be used for assistance to the areas affected by the earthquake disaster. Many jobs were lost when the currency appreciated to an unprecedented level and also hit Japanese exports. The challenge before the government, therefore, is to invigorate the economy, create jobs, and increase income by strengthening the economy.

Impact of TPP on global trade

Thus, if Japan follows Canada’s entrance into the TPP talks, it will add significant economic weight to the potential free-trade pact that could surpass the North American free-trade agreement in global importance. Abe’s move for Japan to join TPP talks aimed at creating a free-trade zone in the Asia-Pacific region is critical for Ottawa, which has made top priorities of diversifying Canada’s trade partners and reducing dependence on the United States.

The TPP framework discussions currently include countries comprising 658 million people and a combined annual economic output exceeding $20.5-trillion. Some experts believe the TPP talks could pave the way for a free-trade zone that would encompass the entire Asia-Pacific region including China and boost global trade by 12 per cent. Like Japan, after ignoring the TPP for several years, the Conservative government of Stephen Harper reversed course late in 2011, signaling its desire to join the talks as it became clear they could lead to the creation of a free-trade pact far larger than NAFTA.

A successful TPP agreement could boost Canada’s economy by as much as US$10 billion or 0.5 per cent of annual GDP and increase Canadian exports by US$15.7 billion or 2.6 per cent by 2025. If successful, trade liberalization and tariff reductions achieved by the TPP could yield global income gains of US$295 billion. Countries currently participating in the TPP talks include the United States, Australia, Chile, Malaysia, New Zealand, Peru, Singapore, Vietnam and Brunei. Mexico and Canada were officially invited to join the talks in 2012 following months of intense lobbying.

In Japan’s case, the DPJ-led government of Noda Yoshihiko had announced his government’s intention to join the TPP talks before the December 2012 elections. Noda then thought such a decision would help his struggling party at the hustings, which proved the case otherwise. That was a gamble that Noda could not afford as the TPP issue is a highly divisive issue as it would likely force the lifting of protections enjoyed by the country’s heavily subsidized agricultural industry. Now his successor, the Abe-II government has announced to take the gamble.

The case of Japan and Canada is almost similarbon the TPP issue. While Japan’s agriculture industry and import restrictions are expected to pose significant hurdles to membership in the TPP, Canada faces many of the same challenges. Canadian dairy, egg and poultry farmers are protected by a system called “supply management” which regulates supply and shields Canadian producers from foreign competitors through tariffs ranging from 150 per cent to 300 per cent. Ottawa has insisted it will not abandon the protections for these farmers despite the fact that a condition of the joining the TPP talks is that members must put everything on the table for negotiation.

The TPP is one of several international trade agreements Canada is pursuing, including potential deals with the European Union and India. Harper visited Asia in December 2012 – India, the Philippines and Hong Kong – in a bid to boost trade and business interests in the region. Canada has welcomed Abe’s decision to join the TPP talks. Canada hopes that Japan’s participation in the TPP would further strengthen Canada and Japan’s strong trade and investment relationship. Both the countries are already working closely towards a bilateral free trade agreement.

Japan is Canada’s fourth-largest export market. In 2011, Canadian exports to Japan totaled almost C$10.7-billion. Leading exports included mineral fuels and oils as well as agriculture and food products. Japan imports almost 9 per cent of Canada’s total food exports and is Canada’s largest source of business investment from Asia, at more than $12-billion in 2011.

South Korea

The US seems determined to bring another allay in East Asia, South Korea, into the TPP fold. It officially requested South Korea to join the TPP talks. Seoul is considering. The South Korean government asked the state-funded Korea Institute for International Economic Policy to conduct a preliminary study on the agreement’s potential impact on the Korean economy. By pushing the TPP, President Barack Obama aims to check rapidly growing China and establish an economic foothold in the region. With the regional agreement to create a giant economic bloc spanning the US, Australia, New Zealand, Chile, Peru, Malaysia, Vietnam, Brunei and Singapore, can Japan and South Korea afford to remain outside of the TPP? South Korea feels it is premature to discuss active participation in the deal because Seoul has signed bilateral free trade agreements with several of the countries in the regional accord, and because it would involve opening Korea’s agricultural markets to imports. For the present, South Korea prefers to monitor TPP negotiations while it pursues competing free trade pacts with Asian partners and hopes that the various regional trade agreements will one day merge.

In November 2010, President Lee Myung-bak admitted to Japan’s Asahi Shimbun newspaper that the potential effectiveness of the TPP is uncertain and that North Korea’s denuclearization was a priority and so talks on TPP can wait. Lee was
attending the 21-member Asia-Pacific Economic Cooperation (APEC) forum meeting in Yokohama, south of Tokyo, where leaders talked about accelerating trade integration in the region. Lee is aware that if a vast Free Trade Area of the Asia-Pacific (FTAAP) is created, the region accounting for 44 per cent of the world’s trade and 53 per cent of global economic output will have a huge impact on the world economy and growth. He also realized that one of the building blocks for the FTAAP was the TPP.

Aiming China?

Another issue that is likely to be of interest to the countries considering the TPP negotiations is inserting trade-secret protections into the TPP as part of a broader attempt to create norms against economic espionage in cyberspace, an effort that spans well beyond US competition with China. The bottom line is that China leads the international theft of sensitive US economic data and thus the suspicion is that the TPP initiative is at least in part directed towards Beijing.

China is wary of the US initiative and predictably voices its opinion that the US move is intended “to constrain China’s rise”.3 China’s has legitimate reason to feel as such as the US has kept China outside of the TPP negotiations. “While China is not formally precluded from joining TPP accession negotiations, the high standards of the agreement regarding intellectual-property and trade-secret protections make Beijing’s accession effectively impossible given its behavior in cyberspace.”4

Assessment

Viewed from a larger perspective, TPP can be seen as yet another initiative to foster regional economic integration in the Asia Pacific region with US leadership. There have been several integration frameworks that have emerged in the Asia Pacific region since 2010. Their contents, rules and membership compositions are all different. The only successful organization has been the Association of Southeast Asian Nations and it aims to establish an economic community by 2015. The other initiatives are FTA among China, Japan and South Korea (CJK FTA), the Regional Comprehensive Economic Partnership (RCEP) and the TPP. Broadly, these initiatives are promoted by the US and China to serve their national interests and compete against each other in trade and investment in rule-making in East Asia and the Pacific.

Japan has shown an interest in participating in all these three initiatives. Prime Minister Abe has articulated how Japan’s participation in the TPP, RCEP, and CJK will offer different potential benefits to Japan, given Japan’s relatively unique economic structure in East Asia. Takashi Terada observes: “Japan’s markets and exports differ substantially from those of China and many members of ASEAN: Japan continues to specialise in high added-value commodity exports, its international-oriented business sectors have expressed a great deal of interest in the liberalisation of services and investment in the region, its machinery and automobile companies have extended their production networks broadly across the Asia-Pacific region, and the strong competitiveness of its manufacturing products, as demonstrated by an average tariff rate of less than 3% at home, illustrates the openness of domestic markets. Given the trade and market features that Japan enjoys, the cost of non-participation in the TPP would be high, failing to secure maximum trade and investment benefits as more countries sign on to form a “critical mass”. In fact, liberalisation of the service and investment sectors, for example, is quite unlikely to make significant progress under RCEP and CJK FTA, partly because China would strongly resist this type of liberalisation which would require transparency about business activities in its state-owned companies.”5

Japan has a significant volume of trade with major Asian countries such as China, South Korea, India, and Indonesia, none of whom currently participate in TPP. Many Japanese companies have set up a wide range of production networks and supply chains involving these countries. In addition, these non-TPP members in Asia tend to protect some of their key industries (e.g., China imposes a 25% tariff on automobiles). Terada observes “…progress in RCEP or CJK FTA is also important as a tool to open these key markets to Japanese exports”.6

Abe has realized that unless Japan participate the TPP process, the country will miss a “golden opportunity” in the integration process, necessary to lift the economy from prolonged recession. What Abe should do is to outline a single comprehensive integration strategy. He needs to tackle the political imponderables, such as the farming lobbies’ financial and voting influence that have led to the maintenance of high tariffs on key agricultural products such as rice and raw sugar. This factor has acted as a major impediment to Japan’s attempts to pursue regional integration. The electorate was disillusioned with the DPJ’s style of governance, which left much to be desired and therefore reposed faith in the LDP. During his second term, Abe is not afraid of taking hard decisions. In particular, his decision to promote monetary easing schemes as a tool to help Japan overcome deflation, which has stalled the Japanese economy for many years, contributed to his high degree of public support. Election to the upper house is due in July 2013 and politicians from the rural constituencies will need Abe’s support to win elections. By announcing to participate in TPP negotiations, Abe has seized the opportunity to resuscitate the economy from its prolonged recession and reap the economic rent that would accrue from elimination of tariffs and many more favourable conditions.

Dr. Rajaram Panda

Professor (Dr.) Rajaram Panda is currently the Indian Council for Cultural Relations (ICCR) India Chair Visiting Professor at Reitaku University in Japan. The views expressed here are the author’s own and do not represent those of either the ICCR or the Government of India. E-mail: [email protected]